Tag Archive: India

1. Volkswagen Hit with $1.4 Billion Tax Demand in India

   31 March 2025 5:03 am Leave a Comment

   Volkswagen $1.4 Billion Tax Demand – Introduction

   Volkswagen’s India operations are under scrutiny following a $1.4 billion tax demand issued by Indian authorities.

   The claim centres on allegations that the automaker misclassified imports to benefit from lower duties.

   This case highlights the growing assertiveness of tax authorities in India and the risks faced by multinationals operating there.

   What’s the Allegation?

   The Directorate of Revenue Intelligence (DRI) claims that Volkswagen India under-declared the value of certain imported components.

   This alleged misclassification resulted in the company paying lower customs duties than it should have over several years.

   The tax demand, totalling approximately $1.4 billion, also includes interest and penalties.

   Volkswagen has contested the claim and is challenging it in court, maintaining that its import classifications were in compliance with applicable rules.

   A Pattern in Indian Tax Enforcement

   This is not the first time India has taken aggressive steps against foreign corporations.

   Similar high-profile cases have previously involved Vodafone, Nokia, and Cairn Energy – all of which raised concerns about India’s investment climate and legal certainty.

   The difference now is that India is increasingly relying on established legal channels and dispute resolution mechanisms rather than retroactive laws.

   Volkswagen’s challenge is expected to proceed through the tax tribunal and court system, rather than be subject to retrospective legislation.

   What Are the Wider Implications?

   This case serves as a warning to other multinationals operating in India – especially those reliant on import-heavy supply chains.

   It underscores the importance of diligent customs compliance and the increasing appetite of Indian authorities to clamp down on perceived tax avoidance.

   It also reveals the fine line between aggressive enforcement and protecting the country’s reputation as a business-friendly destination.

   With India actively courting foreign investment, how this case is resolved could affect wider investor sentiment.

   How Might This Play Out?

   Volkswagen is currently defending its position through formal channels.

   If the case escalates, it could lead to lengthy litigation or even international arbitration.

   Alternatively, the company may seek a negotiated settlement, depending on the court’s early findings and precedent.

   Volkswagen $1.4 Billion Tax Demand – Conclusion

   The Volkswagen tax dispute is another reminder that doing business in emerging markets comes with compliance challenges and regulatory scrutiny.

   While India remains a vital market, it’s also one where multinationals must tread carefully.

   Final thoughts

   If you have any queries about this article on corporate tax disputes, or tax matters in India then please get in touch.

   Alternatively, if you are a tax adviser in India and would be interested in sharing your knowledge and becoming a tax native, then there is more information on membership here.

    

2. India Tightens Rules on Foreign Tax Credit Claims

   9 September 2024 6:03 am Leave a Comment

   India Tightens Rules on Foreign Tax Credit Claims – Introduction

   A Foreign Tax Credit (FTC) allows individuals and businesses to avoid being taxed twice on the same income in two different countries.

   For example, if an Indian company earns income in another country, it pays taxes in that country.

   But when it brings the income back to India, it can claim an FTC to avoid paying tax again on the same income.

   In 2024, India has introduced stricter rules on how businesses and individuals can claim these credits.

   This change is part of the government’s effort to close loopholes and make sure that everyone is following the rules properly.

   What Are the New Rules?

   The new rules require taxpayers to provide more documentation and proof that they’ve paid taxes abroad.

   Previously, it was easier to claim an FTC, but now taxpayers will have to show detailed tax payment records from the foreign country, including receipts, assessments, and tax returns.

   These changes are aimed at reducing disputes with the Indian tax authorities.

   In the past, many companies would claim credits without providing enough evidence, leading to disagreements with the government.

   By tightening the rules, India hopes to make the system clearer and more transparent.

   Who Will Be Affected?

   The new rules will mostly affect Indian companies with foreign income and Indian nationals working abroad.

   For example, multinational companies that operate in several countries will need to ensure that they have all the necessary paperwork to claim the FTC.

   Without proper documentation, they risk paying higher taxes or facing penalties.

   Additionally, expatriates who live and work abroad but still have tax obligations in India will also need to be more careful when claiming their credits.

   Conclusion – India Tightens Rules on Foreign Tax Credit Claims

   India’s move to tighten FTC rules is part of a broader effort to improve tax compliance and reduce tax disputes.

   While this may create more work for businesses and individuals, it’s a necessary step to ensure that the tax system remains fair and efficient.

   Taxpayers should be prepared to keep better records and provide more documentation when claiming FTCs in the future.

   Final thoughts

   If you have any queries about this article on India Tightens Rules on Foreign Tax Credit Claims, or any other tax matters in India, then please get in touch.

3. India increases tax on foreign earnings with the Finance Act 2023

   3 March 2024 3:33 pm Leave a Comment

   India Finance Act 2023 – Introduction

   In a significant move to adjust its tax framework, the Finance Act 2023 introduced an amendment that impacts non-residents receiving royalty and fees for technical services (FTS) in India.

   Since its inception in 1974, the Income Tax Act 1961 has undergone numerous revisions, with the latest changes set to influence multinational corporations and their operations within India.

   Historical Context and Recent Amendments

   Previously, the tax rate for royalty and FTS received by non-residents was set at 10% (plus applicable surcharge and cess), as outlined in Section 115A of the Act.

   This rate was momentarily increased to 25% in 2013 before being restored to 10% in 2015.

   However, the Finance Act 2023 has now doubled this rate to 20% (plus surcharge and cess), effective from 1 April 2023.

   Implications for Non-Residents

   The increase in the tax rate to 20% presents a significant shift for non-residents deriving income from royalty and FTS in India.

   Given that many tax treaties with countries such as the United Kingdom, Canada, and the United States offer a lower tax rate of 15%, non-residents had previously opted for taxation under Section 115A of the Act due to its beneficial provisions, including specific exemptions from filing tax returns in India under certain conditions.

   With the amendment, non-residents are likely to pivot towards claiming benefits under applicable tax treaties, which, while potentially offering lower tax rates, also necessitate additional compliance measures, including tax registrations in India and filing of income tax returns.

   

   Increased Compliance and Documentation Requirements

   The requirement to file tax returns in India, necessitated by claiming treaty benefits, introduces a new layer of compliance for non-residents.

   This includes the need for obtaining tax registrations and electronically filing Form 10F, a declaration form used by non-residents to claim treaty benefits.

   Although there has been a temporary relief allowing manual submission of Form 10F until 30 September 2023, electronic filing will become mandatory thereafter, adding to the compliance burden for non-residents without a tax registration number.

   Moreover, Indian payers making royalty or FTS payments to non-residents must now ensure that they collect and maintain specific documents from the non-residents to apply the treaty rates of withholding tax.

   These documents include the Tax Residency Certificate, No Permanent Establishment Declaration, and the electronically filed Form 10F.

   Failure to comply with these documentation requirements may result in withholding tax being applied at the higher domestic rate, along with potential penalties for the Indian payer.

   Potential Impact on Indian Payers

   The amendment could also have financial implications for Indian payers, especially in cases where royalty or FTS payments are grossed-up to cover the tax liability of the non-resident recipient.

   The increased tax rate may lead to higher cash outflows for Indian payers, emphasizing the importance of efficient tax planning and compliance.

   India Finance Act 2023 – Conclusion

   The Finance Act 2023’s decision to double the tax rate on royalty and FTS for non-residents marks an important change in India’s tax regime, aiming to align with global taxation practices.

   While this may increase the tax burden and compliance requirements for non-residents, leveraging tax treaty benefits could mitigate some of these challenges.

   Final thoughts

   As India continues to refine its tax laws, it is crucial for non-residents and Indian payers alike to stay informed and compliant with the evolving legal landscape.

   If you have any thoughts on this article then please get in touch.

4. VC Funds Not Subject to Service Tax Karnataka High Court Rules:

   17 February 2024 10:48 am Leave a Comment

   VC Funds Not Subject to Service Tax – Introduction

   In a landmark decision on 8 February 2024, the Karnataka High Court overruled a Central Excise and Service Tax Appellate Tribunal (CESTAT) Order.

   The CESTAT Order

   This previous ruling recognised Venture Capital Funds (VCFs) set up as Trusts as ‘distinct entities’ from their investors, thereby subjecting them to service tax for providing asset management services.

   The CESTAT’s decision was based on the premise that VCFs, by managing portfolios or assets for their contributors, were rendering taxable services.

   This interpretation was challenged in the High Court, leading to a significant legal examination of the nature of VCFs under tax law.

   Trusts Not Recognised as Juridical Persons Under Finance Act

   The High Court’s judgment clarified that the Finance Act, 1994, which governs service tax, does not recognise ‘trusts’ as juridical persons.

   This distinction is crucial as the CESTAT had argued that since trusts are treated as juridical entities under the Securities and Exchange Board of India (SEBI) regulations, they should also be considered the same for taxation purposes.

   The High Court disagreed, emphasising that statutory definitions must align with the objectives and purposes of the specific legislation in question, in this case, the Finance Act.

   VCFs as ‘Pass Through’ Entities

   The Court further deliberated on the nature of VCFs’ operations, highlighting their role as ‘pass through’ entities.

   This means that VCFs aggregate funds from contributors and invest these funds based on the investment manager’s advice, without altering the fundamental ownership of the assets.

   The High Court recognised this function, affirming that VCFs act in a trustee capacity, managing investments without directly offering taxable services to the investors.

   Application of the Doctrine of Mutuality

   Central to the High Court’s ruling was the application of the doctrine of mutuality, which posits that a service cannot be rendered to oneself.

   In the context of VCFs, the Court observed that the relationship between the contributors and the trust is inherently mutual.

   The funds invested by contributors are managed in trust, negating the notion of a service transaction between two separate entities.

   VC Funds Not Subject to Service Tax – Conclusion

   This ruling is a significant victory for Venture Capital Funds set up as Trusts, affirming that their asset management activities do not constitute taxable services under the Finance Act, 1994.

   The Karnataka High Court’s decision brings clarity to the taxation status of VCFs, ensuring that their operations are not unduly burdened by service tax liabilities.

   This judgment not only aligns legal interpretation with the operational realities of VCFs but also supports the broader investment ecosystem by recognising the unique structure and function of venture capital investments.

   Final thoughts

   If you have any queries about this article on VC Funds Not Subject to Service Tax then please get in touch.

5. Online Portal’s Hotel Booking Service Qualifies as Tour Operator Service

   15 January 2024 7:19 am Leave a Comment

   India tour operator service – Introduction

   In an important judgment, the CESTAT New Delhi has ruled in favor of a prominent online travel company, involved in facilitating hotel room bookings via its website and mobile application.

   This decision overturns the service tax demand raised by the Revenue Department, which had classified the service under ‘short-term accommodation’ rather than ‘tour operator’ service.

   Key highlights of the decision

   Service Classification as Tour Operator

   The Tribunal emphasised that the online portal acted as a facilitator, connecting hotels with customers.

   Scrutinising the ‘Privilege Partnership Agreement’ between the online portal and hotels, and the ‘User Agreement’ with customers, it was clear that the portal’s role was limited to providing an online booking platform.

   Consequently, it did not directly render hotel accommodation services.

   Eligibility for 90% Abatement

   Challenging the Department’s stance, the Tribunal clarified that the definition of a ‘tour operator’ extends beyond individual transactions.

   The portal, engaged in organizing tours including accommodation arrangements, rightfully fits into the ‘tour operator’ category.

   Therefore, it is eligible for a significant 90% abatement as per the relevant notifications.

   Rejection of Short-Term Accommodation Service Classification

   The Tribunal noted that for a service to be classified under short-term accommodation, it must be provided directly by the hotel.

   The online portal, lacking the necessary licenses and infrastructure, could not be equated with a hotel.

   This understanding further fortified the classification of the portal’s service as that of a tour operator.

   Implications of the Judgment

   This ruling sets a precedent for similar cases, impacting how online travel agencies are taxed.

   It underscores the distinction between being a service provider (hotel) and a service facilitator (online portal).

   Moreover, it provides clarity on the applicability of tax abatements in the travel and hospitality sector.

   Implications of the decision

   The CESTAT’s decision is a significant development in the tax position for online portals offering hotel booking services.

   It delineates the thin line between direct service provision and facilitation, a crucial distinction in the digital age where online platforms are ubiquitous.

   This ruling not only offers relief to the online travel company in question but also paves the way for similar businesses to understand their tax liabilities better.

   It is a testament to the evolving nature of tax laws and their interpretation in the context of modern, technology-driven services. 

   India tour operator service – Conclusion

   For businesses operating in this area, it’s crucial to stay abreast of such legal precedents and ensure compliance with the nuanced interpretations of tax laws.

   Final thoughts

   If you have any queries on this article on the India tour operator service, or Indian tax matters more generally, then please get in touch.

6. Angel Tax Valuation Rules – recent changes

   5 November 2023 4:46 am Leave a Comment

   Angel Tax Valuation Rules – Introduction

    

   The Central Board of Direct Taxes (CBDT) announced changes to the so-called Angel Tax provisions.

    

   It did this through a notification dated 25 September 2023.

    

   The notice has made amendments to Rule 11UA of the Income-tax Rules, 1962, which outline the methodology for calculating the fair market value (FMV) of unlisted equity shares and compulsorily convertible preference shares (CCPS) under Section 56(2)(viib) of the Income-tax Act, 1961. 

    

   Section 56(2)(viib) is commonly known as the “Angel Tax” provision.

    

   What are the Angel tax provisions?

    

   The Angel Tax provisions apply when a company not substantially owned by the public (private or unlisted public company) issues shares at a premium that exceeding the FMV of the shares.

    

   The excess amount received is treated as income from other sources. 

    

   Changes from 1 April 2023

    

   General

    

   Prior to April 1, 2023, Angel Tax applied only to shares issued to Indian tax residents but now extends to shares issued to non-residents.

    

   The amendments introduce flexibility in valuation methods and incentivize venture capital investments, with the following notable provisions:

    

   Types of Valuation Methods

    

   The issuer company can choose from various valuation methods, including new methods for non-resident investors and venture capital investments

    

   Methods for Non-Resident Investors

    

   Five new valuation methods (e.g., Comparable Company Multiple Method) have been introduced for shares issued to non-resident investors.

    

   These methods must be computed by a Category I merchant banker registered with the Securities and Exchange Board of India (SEBI).

    

   Methods for Venture Capital Undertakings

    

   The FMV of equity shares issued to venture capital investors can be used as a benchmark for shares issued to other investors within a specific period.

    

   Methods for Notified Investors

    

   The valuation method for unquoted equity shares issued to Notified Investors is used as a benchmark for shares issued to other investors within a set period. Notified Investors are specified in Notification No. 29/2023 dated May 24, 2023.

    

   Valuation of CCPS

    

   The FMV of CCPS can be determined using the DCF method or new valuation methods based on the type of investor or FMV of unlisted equity shares.

    

   Valuation date

    

   The valuation date allows the use of a valuation report issued up to 90 days before the date of share issuance.

    

   Safe harbour

    

   A safe harbour  provision permits a tolerance limit of 10% between the issue price and FMV.

    

   If the difference does not exceed 10%, the issue price is considered the FMV.

    

   Start ups?

    

   The Angel Tax provisions also apply to startups receiving investments from non-residents, with exceptions based on specified conditions.

    

   Conclusion

    

   While these measures are welcomed, Indian companies continue to face scrutiny regarding share premiums and valuation methods. 

    

   An observation is that Indian tax authorities often challenge valuation methodologies and assumptions, focusing on increasing the tax base by treating undervalued share issuances as income from other sources. 

    

   If you have any queries about the Angel Tax Rules, or any other Indian tax matters, then please get in touch

7. Cryptocurrency to be disclosed for Income Tax

   4 August 2023 5:56 pm Leave a Comment

   Introduction

   Cryptocurrency investors in India have long been wondering whether they need to disclose their holdings to the income tax authorities.

   The answer is now clear: yes, you do.

   New Indian tax regime for crypto

   The Indian government has introduced a new tax regime for cryptocurrency, which includes a 30% tax on gains from the sale of VDAs (virtual digital assets).

   The new rules also require investors to disclose their holdings on their income tax returns.

   Crypto flight?

   This change has prompted some investors to consider transferring their holdings to offshore exchanges or wallets in an attempt to avoid taxes.

   However, it is important to note that this could have serious consequences.

   The Foreign Exchange Management Act (FEMA) prohibits the transfer of foreign assets without prior permission from the Reserve Bank of India.

   If you are caught transferring your cryptocurrency holdings to an offshore exchange or wallet without permission, you could face severe penalties.

   Therefore, it is advisable to declare your cryptocurrency holdings on your income tax return, even if they are held in an offshore account. This will help to protect you from any potential legal problems.

   Indian crypto tax – Conclusion

   The new tax rules for cryptocurrency are complex, so it is important to seek professional advice if you are unsure about your obligations.

   However, by following the above guidance, you can ensure that you are compliant with the law and avoid any potential penalties.

   Indian crypto tax: Tips for disclosing your cryptoholdings on your income tax return:

   • Keep accurate records of all your cryptocurrency transactions.
   • Use the new Schedule- Virtual Digital Assets section of the IT Form to report your gains and losses.
   • If you have transferred your holdings to an offshore exchange or wallet, be sure to declare them as foreign assets.
   • Seek professional advice if you are unsure about your obligations.

   By following these tips, you can ensure that you are compliant with the new tax rules for cryptocurrency and avoid any potential penalties.

   If you have any queries about Indian crypto tax or Indian tax matters in general, then please do not hesitate to get in touch.

   The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article